Most of us will have begun or be about to begin our Christmas shopping, but if you’re not careful about how you pay for all those festive expenses, you risk starting off the New Year in the red.
Many people every year need to borrow to cover Christmas costs, with some expecting to still be paying off what they owe well into next year.
With festive bills often running into hundreds of pounds, it’s crucial to think very carefully about how much interest you’re paying on your borrowing, as this can add substantially to your overall costs. Here, we look at some of the different ways to pay for Christmas, and why it’s vital to have a clear budget before you start shopping.
Work out a budget - and stick to it
Heading to the shops with no idea of what you want to buy or how much you plan to spend is a surefire way to end up with a financial shock when your bank statement arrives.
Before you start shopping, you therefore need to work out how much you can afford to spend on each person, and what you’d like to buy for them. If you think you’ll be tempted to blow your budget, leave your credit and debit cards at home and only take cash so that when that has run out, you don’t have any other way to pay.
Using savings or income
The best way to pay for Christmas expenses is out of your savings or income, so that you won’t have anything to pay back. However, make sure you don’t clear out your savings accounts, as it’s vital to always keep some emergency savings readily available in the event of those unexpected events such as a boiler breakdown or car repairs. Experts usually recommend trying to keep between three and six months of income stashed away so you have a good-sized buffer to fall back on. Learn more in our article How to build an emergency fund.
Be careful to avoid going into your overdraft too if you’re spending from your current account, as overdraft charges are often steep, especially if you exceed any arranged overdraft limit.
Credit cards
Many of us will use a credit card to cover our Christmas spending this year and, whilst this isn’t a bad option given the protection that credit cards provide, you should only ever use one if you’re confident you can clear your balance quickly. You can find out more about credit card protections in our article Section 75: Credit card protections explained.
If you aren’t, then unless you have a card with a 0% introductory rate on purchases, interest charges can build up quickly, making it more difficult to pay off what you owe.
Remember too that If you can, you should avoid using your credit card to withdraw cash to spend on Christmas shopping. You’ll be charged fees, sometimes up to 4% with certain providers and unlike with purchases made on a credit card, with cash withdrawals you’ll typically be charged interest from the day you make the cash withdrawal, even if you clear the balance in full at the end of the month. Learn more in our Simple guide to credit cards.
Buy now pay later
Buy now pay later plans do exactly what they say on the tin. That is to say, they enable you to buy goods now and then to pay for them in the future, usually without having to pay any interest.
Your payments are typically deferred for 30 days but this can vary by provider, or you may be able to pay for the items you’ve bought in regular instalments instead.
Although using buy now pay later schemes can be a useful way to spread the cost of more expensive items, if you miss any of the repayments, you run the risk of being hit with late payment charges. This in turn could damage your credit score, making it harder for you to borrow in future.
You should therefore only ever consider using this type of scheme to cover Christmas costs if you know you’ll be able to pay off what you owe within the timeframe given by the scheme provider. Learn more about buy now pay later in our article How do ‘Buy Now Pay Later’ schemes work?
Loyalty points and vouchers
Check any shop loyalty schemes you belong to to see if you have any points you can cash in to get money off your festive shopping. For example, if you’ve built up 5,000 points on your Sainsbury’s Nectar card, you can get £25 off your Christmas shop. If you have a Tesco Clubcard, you need 5,000 points to get £50 off your shop.
Bear in mind that some loyalty schemes allow you to boost the amount your points are worth if you spend them on rewards rather than your food shop. For example, with Tesco the value of your points is doubled if you spend them on rewards such as magazine subscriptions or days out.
A final thought…
If you’re worried about over-spending this Christmas, take action now so that you can stay in control of your finances and not the other way around.
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “Consider what else you need to buy, and assess whether it’s realistic within your budget. That gives you the opportunity to think about whether you can avoid busting the budget by shopping around, or whether you need to make more drastic cuts.
“If you can’t buy for everyone, or cover the cost of all the trimmings, consider where you can cut back. It might mean talking to family and friends, and asking whether you can skip some gifts – or only buy for children. If you get in before everyone has shopped, you can give everyone a chance to save.”
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